China-ASEAN FTA: Who wins?

China-ASEAN FTA: Who wins?

Michael Vatikiotis , Vientiane

China is fond of characterizing its ties with neighboring
Asian nations as built on a foundation of "win-win" for all. But
just who wins in a China-ASEAN free trade area is a matter of
debate -- and also a matter of time.

On the face of it, creating a single market of almost two
billion people with a combined gross domestic product of US$2
trillion cannot be bad for business. Yet some of China's trading
partners are starting to learn that China's economic embrace
isn't quite as warm and friendly as Beijing's smiling leadership
would have us all believe.

Take the case of Thailand, where in actual fact, bilateral
talks on a bilateral trade pact with China were suspended at the
end of July. The Thai government said that it was suspending the
talks to avoid duplicating tariff-cutting measures under the
broader regional framework. But in reality, the reason was that
opening up Thailand's market to a free flow of Chinese
agricultural products has hurt Thailand's farmers and they are
beginning to squeal. The government wants to avoid annoying
voters ahead of expected elections in January or February next
year.

China trumpeted its so-called "early harvest" agreement on
agricultural goods with Thailand as the harbinger of free trade
to come in the region. But with Thailand's markets flooded with
Chinese garlic, lychees, oranges and apples, Thai farmers have
found it hard to compete on price.

Neither has it been plain sailing to get Thai products into
China. Thailand's tropical fruit is more perishable than China's
temperate produce, and exporters cannot afford the long delays at
customs that they have experienced in China. Perhaps this will
change once the Kunming to Bangkok highway is completed in 2007,
as envisaged in the agreement signed this week in Vientiane.

It's not just a matter of apples and oranges in the long term.
Right now China boasts a deficit in its $100 billion worth of
two-way trade with ASEAN. That's because China is sucking in raw
materials from ASEAN to feed its voracious appetite for energy
and primary commodities like palm oil and rubber. The ten member
states taken together comprise China's fourth biggest source of
imports.

But longer term, this balance will shift in China's favor as
the mainland's companies start exporting consumer goods to ASEAN
and consumers begin to favor cheaper Chinese brands over more
expensive Japanese and Korean goods. ASEAN's consumers are
already buying Haier refrigerators and TCL television sets in
increasing numbers.

Some Chinese consumer product companies have started to build
manufacturing plants in ASEAN and it's only a matter of time
before China becomes the chief supplier of household appliances
to the region. This will hurt local manufacturers and make it
hard for countries like Malaysia with its Proton cars, or
Singapore with home-grown brands of digital technology to keep
these companies competitive.

Fears of being obliterated by more efficient Chinese companies
will in all likelihood throw obstacles in the path of a smooth
transition to tariff-free trade between China and ASEAN.
Indonesia is lukewarm at best about the idea, and all ASEAN
countries have perfected the art of defending a so-called
sensitive list of goods on which tariffs are preserved.

Realistically, though, ASEAN has no choice but to hitch its
fortunes to China's growing economy and hope that it will be a
case of all ships rising at the same time. China attracted more
than $50 billion in foreign direct investment last year compared
with around $20 billion that came ASEAN's way.

That's no to say that ASEAN cannot and should not redouble
efforts to make itself attractive to investors. Shrewd investors
search for alternatives and fears of a credit crunch or downturn
in China's economy makes Southeast Asia, with its better banks
and high consumer incomes, a good bet. A more integrated ASEAN
market will help enhance the region's allure.

It is therefore praiseworthy that as well as embellishing its
free trade agreement with China, ASEAN has also used the
Vientiane summit to accelerate the formation of the ASEAN Free
Trade Area by scrapping tariffs on cars and other consumer goods
three years earlier than scheduled in 2007.

The writer is a former editor and chief correspondent of the
Far Eastern Economic Review. He can be reached at
michaelvatikiotis@yahoo.com